Making it all pono a work in progress

Broken Trust: 10 years ago today

Editor's note: U.S. District Judge Samuel P. King was among the five signatories to the Aug. 9, 1997, "Broken Trust" essay in the Star-Bulletin, which led to major reforms of the Bishop Estate, now Kamehameha Schools. King and Randall W. Roth, also a signatory of the essay, co-authored the 2006 book, "Broken Trust: Greed, Mismanagement & Political Manipulation of America's Largest Charitable Trust," named Book of the Year by the Hawaii Book Publishers Association. This column is derived from King's May address to Bank of Hawaii managers.

By Samuel P. King

HAVE THE problems that beset the Bishop Estate and led to the publication of the "Broken Trust" essay in the Star-Bulletin 10 years ago been resolved so that all is now pono? The three most important areas of controversy had been trustee selection and behavior, educational reach and student admissions policy. They are still areas of controversy.

Princess Pauahi named the first five trustees, all Caucasians including her husband, and decreed that the number of trustees "shall be kept at five" and that "vacancies shall be filled by the choice of a majority of the Supreme Court, the selection to be made from persons of the Protestant religion."

The supreme court she was referring to was the court of three justices who had been appointed, and whose successors would presumably be appointed, by one of her relatives. During the early days of the constitutional monarchy, that supreme court was given the duties of a probate court and other initial proceedings along with the usual appellate jurisdiction. Eventually these initial proceedings were conferred on newly created circuit courts; and although the supreme court then no longer exercised the powers of a probate court the supreme court justices continued to select successor trustees of the Bishop Estate. The new selectees were then routinely sworn into office by the circuit court judge exercising probate powers.

SUPREME CONFLICTS OF INTEREST

When Hawaii became an organized Territory of the United States, the laws of Hawaii in this regard were carried over unchanged and the three Supreme Court justices of the territorial supreme court, who now were appointed by the president of the United States and confirmed by the U.S. Senate, continued to select successor Bishop Estate trustees. Eventually a circuit judge exercising probate powers ruled that the Supreme Court justices lost the power to select such trustees when they lost probate powers and that he as probate judge would name the successor trustee, which he promptly did.

Of course, the matter was appealed to the challenged Supreme Court whose members held that they were acting not as a court but as individuals in their private capacity when they selected a successor trustee. Their nominee was sworn into office and the probate judge's selection was rejected. On further appeal to the 9th Circuit Court of Appeals the Hawaii justices were supported in their rationalization. This in spite of the obvious conflict of interest when the Hawaii Supreme Court was presented with an appeal from an action by Bishop Estate trustees whom the members of the same court had selected.

When Hawaii became a state, the now five members of the Supreme Court who had been appointed by Hawaii's elected governor and confirmed by Hawaii's elected Senate continued to select Bishop Estate trustees although they were far removed from the arrangement contemplated by Princess Pauahi. The conflict of interest in this arrangement became even more obvious. The practice was again challenged and again approved by five circuit judges sitting by designation by the chief justice, as something the justices did in their private capacity and not as sitting judges. Nevertheless, when one of their own number was selected he presumably did not vote on his own selection, either as a judge or in his private capacity.

A few months after the Kamehameha ohana marched from the Royal Mausoleum at Mauna 'Ala to Bishop Estate headquarters at Kawaiahao Plaza on May 15, 1997, four of the justices announced that they would no longer select Bishop Estate trustees. They also withdrew from selecting trustees of the Lunalilo Trust. They gave as the reason for their action that their continued participation would "promote a climate of distrust and cynicism" and "undermine the trust that people must have in the judiciary." As the younger generation might say: "Hello?"

FLUID SELECTION PROCESS

So how are successor trustees to be selected? The initial replacement trustees were selected by the probate judge for staggered five-year terms. For the most recent selection, a procedure was adopted by the probate judge whereby a temporary search committee selected by the judge after considering the recommendation of interested parties, especially of Kamehameha ohana, presented a short list of three persons from among whom the probate judge selected one nominee after a period of time in which to allow for public input. The details of this process are open to change each time a new selection comes up, which would be at least once a year. Under the present procedure, incumbents could be appointed for a second five-year term, which might not require the full process.

The system has worked so far. There has been general approval of the recent selection of Corbett Kalama by Judge Colleen Hirai in her capacity as the probate judge for the First Circuit Court. Trustee Kalama is a senior vice president of First Hawaiian Bank. He is said to be a direct descendant of Keakealaniwahine, who is said to be a great-great-grandmother of Kamehameha the Great. Kalama is quoted as saying that he considers a Bishop Estate trusteeship to be a great honor and that he would be more than willing to serve without compensation. There has not been any similar statement by any of his fellow trustees.

Could other and future justices of the Hawaii Supreme Court take back the power to select Bishop Estate trustees? There have been expressions in the past that selection by Supreme Court justices gave the Bishop Estate, and especially the memory of Princess Pauahi, a certain special aura that should be retained. Much oratory has been devoted to the necessity of honoring the princess's legacy.

DEPARTING FROM THE WILL

Actually, the only part of her will that has been honored exactly is the number of trustees, which she decreed "shall remain at five." There has also been reasonable compliance with Princess Pauahi's wish that the trustees "devote a portion of each year's income to the support and education of orphans, and others in indigent circumstances, giving the preference to Hawaiians of pure or part aboriginal blood."

Princess Pauahi decreed that there shall be "two schools, each for boarding and day scholars, one for boys and one for girls." Several years ago the two schools were combined, but the resulting combination was, and still is, referred to as the Kamehameha Schools; there also are schools on the islands of Hawaii and Maui.

She decreed that the schools "provide first and chiefly a good education in the common English branches," which was understood to mean "reading, writing, and arithmetic," and also "instruction in morals and in such useful knowledge as may tend to make good and industrious men and women," and that "instruction in the higher branches" was "to be subsidiary to the foregoing objects." The boys' school in fact started out as a trade school.

Today Kamehameha Schools offers a first-class college-preparatory education, as it has for many years past. It has expended considerable time, effort and money to the preservation and, indeed, promotion of the Hawaiian language and ancient Hawaiian cultural practices. The estate helps finance a college education for Kamehameha graduates. Recently it was announced that the estate had authorized a substantial contribution to assist the homeless, among whom were many Hawaiians. While these may all be laudable uses of Princess Pauahi's largesse, they were not mentioned in her will. On the other hand, she was establishing "schools," and only designating the subjects to be taught "first and chiefly." Still, it is a linguistic stretch to encompass all of present-day Kamehameha Schools' expenditures if one is serious about being faithful to Princess Pauahi's will.

Princess Pauahi decreed that the successor trustees and the teachers be "persons of the Protestant religion." The latter requirement relating to teachers was declared to be in violation of applicable federal statutes, and the former relating to trustees has been increasingly inoperative. In recent years, several successor trustees underwent last-minute conversions to Protestantism shortly before taking office as trustees. The impression an outside observer received has been that this requirement has been ignored by the Supreme Court justices when selecting a replacement trustee.

SCALED DOWN TRUSTEES' PAY

Princess Pauahi's will says nothing about compensation for the trustees. An early decision by the Supreme Court of the constitutional monarchy held that nevertheless the trustees were entitled to reasonable compensation. Years later under the territorial government, the Hawaii legislature passed a law that set percentages of income and principal, which the legislators thought would limit the amount taken by the trustees. The trustees interpreted this law as setting the amount they could take, completely ignoring the legal principle in the United States that the amount of compensation taken by a trustee of an eleemosynary trust can never exceed the value of his or her services. As a result, the compensation taken by Bishop Estate trustees eventually hovered around $1 million each.

State law now decrees that such compensation shall be "reasonable" as a result of legislative action during the height of the "Broken Trust" controversy. At present the compensation set by the probate judge works out at about $100,000 each with an extra $25,000 for the chairman. A few years ago, the probate judge had suggested that $200,000 each would not be unreasonable, but the new trustees accepted the lower figure.

Princess Pauahi's will did not limit the term of service of a trustee. Until the appointment of Hung Wo Ching in 1968, trustees served for life unless they resigned earlier. Ching was appointed to a term ending at his age of 70 years. Such a limitation was in fact suggested by the incumbent trustees (or some of them). The next appointment was of Supreme Court Chief Justice William Richardson, who held out successfully for age 72. For subsequent appointments, the age limitation went back to 70.

The will directs the trustees to "annually make a full and complete report of all receipts and expenditures" and to file "annually an inventory of the property in their hands and how invested, and to publish the same" in some Honolulu newspaper. Compliance with this requirement during the more than 100 years since the trust came into existence has been skimpy. Presumably under the new management, this situation will improve.

Princess Pauahi's testamentary trust is a 19th-century document that no practicing attorney would draft today. Full ownership of the trust's assets and full responsibility for the trust's operations fall upon the five individual trustees. If one wishes to sue the Bishop Estate or Kamehameha Schools for any reason, the suit will be against the five trustees. If one wishes to contract with the Bishop Estate, the contract is with the five trustees. The trustees have the final responsibility for hiring and firing, and for all expenditures, including the purchase of pencils. Their actions do not have to be unanimous, as the princess decreed that "three of them at least must join in all acts." This would have been the law anyway if she had not so decreed. Nevertheless, all of them would be named in any legal action. They may, of course, delegate various duties to others, and the new trustees have taken a step toward a more usual corporate arrangement by theoretically delegating day-to-day operational control to a CEO, but they remain ultimately responsible for everything that goes on at the several Kamehameha schools. As a result, the premiums on their liability insurance policies are what is referred to as humongous.

DEBATE ABOUT ADMISSIONS

The question of admissions to the Kamehameha Schools has received enough publicity for anyone to be expert on the subject. Please note that the Hawaiians-only admission practice which is under fire is only a policy adopted by the first trustees and continued today. The will itself contains no racial restriction except as to indigent and orphan children. In early days the schools did in fact admit a few non-Hawaiians without there being any uproar. The issue will probably come up again.

So, as no one seems to be adhering to the literal provisions of Princess Pauahi's testamentary trust, why not turn it into a not-for-profit corporation with directors elected by the Kamehameha alumni? Robert Midkiff has recommended such a step, citing Yale, Harvard and Punahou as current examples (Star-Bulletin, July 30-31, 2006). The trustees at some time in the past did look into such a move but decided against it. They also looked into the possibility of moving the trust to an Indian reservation to escape the impact of federal laws and even had their lawyers draw up the papers to do so, but they did not get around to signing them. Not the least advantage of a not-for-profit corporation is that directors who serve without compensation would have relatively little personal liability, which would translate into a substantial reduction in the cost of trust-paid liability insurance.

The Bishop Estate and Kamehameha Schools will be with us far into the future. The problems that faced the Kamehameha ohana seem to be under control for now, despite a horse-and-buggy organizational structure and a penchant for secrecy. Those who are affected by the estate's policies or actions will no doubt be vigilant and vocal.